How 15 Seconds Could Change Pandora’s Fortunes for the Better

Pandora Media(NYSE:P) played more than 5 billion hours of music for nearly 74 million listeners last quarter. But 15 seconds could be the key to sustained profits for the audio streaming leader.

Late last week, Pandora announced it is now offering ad-supported listeners access to its premium listening experience in exchange for viewing a single video ad.

IMAGE SOURCE: PANDORA MEDIA

More specifically, Pandora users who opt to watch a 15-second ad will be rewarded by unlocking a complimentary session of Pandora Premium, the company’s $9.99-per-month on-demand product.

“Our ad-supported listeners’ top request has consistently been the ability to directly play the specific songs, albums, or playlists they want,” explained Pandora CEO Roger Lynch. “These new features address that need by marrying rewards-based advertising with the best-in-class on-demand experience we’ve created with Pandora Premium.”

To be fair, Pandora’s move into video ads isn’t entirely new. It introduced a similar feature back in September, calling it “Video Plus,” as a way to give listeners a taste of options such as skipping more songs or replaying their favorite tracks — features otherwise only available under its cheaper $4.99-per-month Pandora Plus service.

But this also marks the fulfillment of Lynch’s promise during last month’s earnings conference call to expand Pandora’s reach into rewards-based advertising. And that’s only one of several compelling opportunities for improvement he identified since assuming his role as CEO almost exactly three months ago; Lynch also wants Pandora to tap into new forms of content, such as podcasts, spoken word, and traditional radio, as well as expand its distribution partnerships and optimize its marketing execution.

The bottom line

But how, exactly, can 15-second video ads propel Pandora into the black?

For one, there’s the obvious incremental advertising revenue Pandora can generate. For perspective, Pandora’s ad revenue in Q3 climbed a modest 1% year over year, to $275.7 million. That’s nearly 77% of total company sales excluding Ticketfly, which Pandora divested during the quarter to shore up its balance sheet and focus on its core business.

Advertisers have reason to love the new ads, too. According to Pandora when it launched Video Plus, most users who watched the ads were between 18 and 34 years old, which is a coveted target audience for advertisers. Pandora also said users who opted in listened for 57% longer and used its “thumb” function 65% more often.

But arguably most exciting for Pandora investors is that this gives the company a way to more effectively transition its massive ad-supported listener base to the more lucrative Pandora Premium service.

That’s not to say Pandora wasn’t already faring well to that end. Its number of paid subscribers climbed 29% year over year last quarter to 5.19 million, driving 50% growth in its “subscription and other” revenue line to $84.4 million. But keeping in mind Pandora Premium was only just launched this past March, the number of Pandora Premium subscribers only just eclipsed the 1 million mark in October.

In any case, we’ll need to wait until Pandora’s next quarterly call in February to hear whether these new video ads are making a positive impact. But if all goes as planned, I suspect investors will be dancing to the sweet sounds of market-beating gains.